Katrina could maintain boom in U.S. housing

Katrina's Wake

Hurricane Katrina's reverberations could help sustain the nation's housing boom, stretching out the strong market by keeping borrowing costs low.

The National Association of Realtors altered its forecast last week to predict 130,000 additional home sales next year because it expects the hurricane to slow the economy and prevent long-term interest rates from rising as fast as they otherwise would have.

Mortgage giant Freddie Mac agrees that Katrina will restrain interest rates: Chief Economist Frank Nothaft now expects an average of 6.2 percent for a 30-year fixed-rate mortgage next year, rather than 6.3 percent. The cheaper the cost for borrowed money, the more likely people will be to buy homes.

Hurricanes don't usually affect housing markets on a national level - but this was no usual hurricane.

It's not a typical housing market, either. Several years of historically low rates have helped fuel sales and price growth. This year, Americans are on pace to buy 8.3 million new and existing homes, a record.

The Realtors' association now says that sales next year, originally expected to fall below 2004 levels, should end up a bit above at 8.1 million.

"The home sales activity is getting a slight lift," said Lawrence Yun, an economist for the association.

A key reason is that the hurricane's effect on the economy seems to be just enough to hold back mortgage rates without wreaking havoc on employment nationally, said Celia Chen, who studies housing issues for Economy.com, a research firm in West Chester, Pa.

"The underlying fundamentals [for] housing will be fairly sturdy," she said. "Basically what Katrina's done is shifted our outlook ... but not enough to suggest there will be new records again as we go into next year."

If the hurricane does stop job growth, though, all bets are off, said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies.

"Then it makes the housing market much more vulnerable," he said.

So far, the ripple effects have added fuel to markets near the hurricane's path but outside the worst swath of destruction. The Realtors' association is seeing strong growth in demand in Baton Rouge and Lafayette, La. Even far away - such as in the 400-mile distant Memphis, Tenn. - former New Orleans residents are looking for homes to buy.

One Memphis property that sat on the market for two months had 10 bidders after the hurricane, Yun said.

"There are early indications that some or many of the displaced people may not return," he said.

There are other, conflicting forces at work post-Katrina.

Even though the cost of borrowing money for a home should stay relatively low, the cost to build one seems likely to rise. The prices of lumber and oriented strand board, a prime building panel, increased sharply after the hurricane and remain high, mainly because Katrina's contribution to gas prices makes it more expensive to truck those goods to builders.

"The delivered price is greatly affected by the cost of fuel," said Mark Hunt, location manager in North East for Builders FirstSource. "We all pay more. ... It's just passed down the line."

When cleanup in the Gulf Coast stops and reconstruction starts, that demand will put more pressure on prices for construction materials such as plywood, cement, roofing tiles and drywall, Nothaft said.

At least 200,000 homes were destroyed by Katrina, the Realtors association said, far more than the destruction of Hurricane Andrew in 1992. On Thursday, President Bush promised a federally financed rebuilding effort, with a price some members of Congress estimate at $200 billion or more.

That rebuilding could mean a balancing act for anyone who wants a new home - there or here.

"Higher costs of new construction will be offset a bit by the somewhat lower level of mortgage rates," Nothaft said.

But not all economists are convinced that Katrina will keep mortgage costs down. That's because interest rates haven't behaved normally for a while.

Though the Federal Reserve has steadily raised short-term rates for more than a year, long-term rates have stubbornly refused to follow. A "conundrum," Fed Chairman Alan Greenspan has called it. Mark Vitner, an economist with financial services company Wachovia Corp., attributes it to high demand for Treasury bonds, in part from foreign investors. More demand drives up prices on bonds, which drives down interest rates.

But now the government must sell more bonds to cover federal spending in the Gulf Coast, he said. At the same time, "the response to the storm has shaken foreign investors' confidence in the U.S. economy," he said.

"That's hitting both sides of the conundrum," Vitner said. "I'm a little concerned that ... is going to lead to higher long-term interest rates."

Barry Glazer, a broker for Century 21 Downtown in Baltimore, hopes interest rates will stay low, but he's counting on a different Hurricane Katrina effect. The way he sees it, anyone who commutes to the city from the suburbs has reason to reconsider, with gas prices topping $3 a gallon.